COVID-19 IMPACT ON AFRICA

Source: McKinsey & Company

The COVID-19 pandemic  in Africa is already disrupting millions of people’s livelihoods, with disproportionate impact on poor households and small and informal businesses—and the pace of this disruption is likely to accelerate in the weeks ahead. Africa’s GDP growth in 2020 could be cut by three to eight percentage points. The pandemic and the oil-price shock are likely to tip Africa into an economic contraction in 2020, in the absence of major fiscal stimulus.

Against the backdrop of this worrying public-health situation, African countries will have to address three major economic challenges in the coming weeks and months:

The impact of the global pandemic on African economies. This includes disruption in global supply chains exposed to inputs from Asia, Europe, and the Middle East, as well as lower demand in global markets for a wide range of African exports. Moreover, Africa is likely to experience delayed or reduced foreign direct investment (FDI) as partners from other continents redirect capital locally.

The economic impact of the spread of the virus within Africa, and of the measures that governments are taking to stem the pandemic. Travel bans and lockdowns are not only limiting the movement of people across borders and within countries, but also disrupting ways of working for many individuals, businesses, and government agencies.

The collapse of the oil price, driven by geopolitics as well as reduced demand in light of the pandemic. In the month of March 2020, oil prices fell by approximately 50 percent. For net oil-exporting countries, this will result in increased liquidity issues, lost tax revenues, and currency pressure. (We should note, however, that lower oil prices will potentially have a positive economic impact for oil-importing countries and consumers.)

For Africa’s economies, the implications of these challenges are far-reaching. A slowdown in overall economic growth is already being felt, and this is acute in hard-hit sectors such as tourism. Many businesses, particularly SMEs, are under significant cost pressure and face potential closure and bankruptcy. That is likely to lead to widespread job losses. At the same time, the pandemic will impact productivity across many sectors. Closures of schools and universities could create longer-term human capital issues for African economies—and could disproportionately affect girls, many of whom may not return to school. Not least, the crisis is likely to reduce household expenditure and consumption significantly.

The knock-on effects for the African public sector could be severe, in terms of reduced tax revenues and limitations on access to hard currency. African governments will face rising deficits and increased pressure on currencies. In the absence of significant fiscal stimulus packages, the combined impact of these economic, fiscal, and monetary challenges could greatly reduce Africa’s GDP growth in 2020.

An action framework for African governments

The COVID-19 crisis is stretching the capacity of governments across the world, but African governments face greater challenges than most. In particular, they must grapple with the following:

• Limited fiscal capacity. The ratio of public revenues to GDP in African countries averages just 19 percent while debt servicing already absorbs 22 percent of revenues in Africa. That gives African governments limited scope for stimulus packages compared to their peers in other regions. Such packages will need to be carefully targeted, and supported by development partners and philanthropic organizations.
• Highly informal economies with many small and micro businesses. Small and medium enterprises create 80 percent of the continent’s employment, compared to 50 percent in the European Union and 60 percent in the United States. African small businesses have limited ability for their staff to work from home, compounded by issues such as power outages and high costs of data. During this crisis, governments will need to extend support to small and medium enterprises, given their role in the economy and the difficulties they face. Additionally, the informal sector is estimated to make up 55 percent of the economy in sub-Saharan Africa, so efforts at economic revitalization will need to extend to informal parts of the economy.
• Young populations, widespread poverty. Africa is the most rapidly urbanizing region in the world, with 50 to 70 percent of urban dwellers living in slums. This has huge implications for the effectiveness and implementation of quarantine methods in these poor sanitary conditions. Africa also has a young population—the median age is 19—and there are an estimated 80 million young people in vulnerable employment and a further 110 million who do not contribute to the economy. School closures will have severe impact on young Africans, with long-term consequences. Female students in particular are at risk: for many of them, a few months’ absence from school could mean the end of their education.
• Constrained health systems. There are 0.25 doctors for every 1,000 people in Africa. There is also a low number of hospital beds—1.4 beds per 1,000 people These factors, combined with limited testing and treatment capability, point to an urgent need to expand healthcare capacity.

Given these constraints, African governments will need to be both targeted and creative in their response to the crisis. They will also need to foster intense and closely aligned collaboration with the private sector and development partners.

Priorities

1. Set up national nerve centers. Governments, with the close involvement of the private sector and other key stakeholders, need to take rapid action to set up or build out national nerve centers to coordinate and accelerate their response to the crisis. These nerve centers should bring together crucial leadership skills, organizational capabilities, and digital tools—giving leaders the best chance of getting ahead of events rather than reacting to them.
2. Anticipate and manage the health crisis. Governments will need to take even stronger measures to delay and reduce the peak of the epidemic—including more intensive social distancing through mobility restrictions and lockdowns as well as larger-scale surveillance to test and isolate identified cases. In parallel, governments must immediately prepare for a potentially rapid surge of cases, which will demand significant numbers of testing facilities, hospital beds, ventilators and other medical equipment, as well as additional health professionals. Given the limited existing resources in most African healthcare systems, bold and locally tailored measures will be required to create surge and prevent mortality among the most vulnerable population.
3. Secure food supply and essential services. Governments need to secure food supply chains, particularly the supply of priority products—and ensure the appropriate pricing of these products. They will also need to ensure that access to essential services such as telecoms and utilities is maintained.
4. Ensure support for most vulnerable populations. This includes taking measures to protect jobs and to support affected communities, particularly the most vulnerable populations, through social safety-net mechanisms—including cash transfers.
5. Anticipate and manage the impact on the economy. Governments need to anticipate what the impact on their economy is likely to be through scenario analysis and offer a short-term stimulus package to maintain financial stability and help businesses survive the crisis—particularly those in strategic industries. Given the expected loss of tax revenue, governments will also to need to identify opportunities to urgently reduce non-essential spending. Additionally, governments will need to anticipate and prepare for what the post-crisis  “ next normal” will look like.

While most African countries have already announced specific initiatives across all five areas, they will need to build on these early efforts with great boldness and commitment to collaboration.

Actions for the private sector

The first responsibility of private-sector firms is to ensure business continuity in the ongoing crisis. Based on our discussions with risk and health professionals in more than 200 companies across sectors, we suggest several critical steps for firms—starting with establishing their own central nerve centers. These nerve centers can coordinate company responses on four key dimensions, as follows:

• Protect workforces. The focus here is to guarantee continuation of employment in a safe working environment; adjust to shift or remote work with the required tools; and preserve the employees’ health through safe working facilities and strict isolation of suspected cases.
• Stabilize supply chains. Companies need to guarantee business continuity through transparent supplier engagement, demand assessment, and adjustments of production and operations.
• Engage customers. Companies can hone their crisis communication and identify changes in key policies, ranging from guidelines to guarantee social distancing, to waivers of cancellation and rebooking fees.
• Stress-test financials. Companies need to develop and assess relevant epidemiological and economic impact scenarios to address and plan for working capital requirements. They will also need to identify areas for cost containment across the business.

Beyond their own businesses, private-sector firms also have a critical role to play in supporting governments to tackle the pandemic and its economic fallout. This is especially true of large business and business associations, which will need to work hand-in-hand with governments to manage and mitigate the crisis.

Individual companies across sectors also have a critical role to play. Examples include beverage producers switching production lines to hand sanitizer; apparel manufacturers producing face masks and hospital robes; telecommunication companies adjusting their data offering; and banks adjusting tariffs. Many companies have also made monetary contributions to solidarity funds for the most vulnerable. More such commitment will be needed.

Actions for development institutions

Development partners have already begun to step up to support African governments in their response to the crisis—including making major financial commitments.

Development institutions are also examining their existing initiatives and funding to see how they can best support African countries, businesses, and households. Given the magnitude of the problem, however, they will need to build on these steps with bigger and bolder initiatives.Examples of the actions they could take include the following:

• Repurpose existing 2020–21 funding towards COVID-19 response and recovery efforts. Institutions need to find creative ways to rethink existing funding programs, introducing new flexibility to meet current needs.
• Help governments make smart investments to address the crisis. In repurposing their existing programs, development partners can incentivize and help governments to make smart investments—both to address the immediate needs of the pandemic response, and to shore up the resilience of healthcare and economic systems for the future. For example, they can help ensure that, as governments ramp up surge capacity for COVID-19 lab testing, this has a permanent impact in improving the availability of diagnostics for the population.
• Help governments design effective fiscal and business stimulus packages. Given the unprecedented nature of this crisis, high levels of joint thinking and sophisticated problem solving will be required to design and target effective stimulus packages. Development institutions can provide valuable thought partnership to finance ministries across Africa, as well as much-needed financial support.
• Design new financial instruments to support businesses and countries. These could include solutions spanning liquidity, re-insurance, conditional cash transfers, and more. A critical need will be to develop creative financial-support models for small and informal businesses, as well as for households. This will require real creativity and true partnership between development institutions and commercial financial institutions.
• Support countries to rapidly expand their healthcare systems. Development institutions can help boost access to critical healthcare supplies (such as testing kits and masks); the capacity of the healthcare system (including increasing the number of hospital beds); and the availability of healthcare professionals.

Help design and launch bold new pan-African or regional initiatives. We set out several ideas for such initiatives—including an Africa Recovery Plan that encompasses an extensive stimulus package—in the final section of this paper.

Bold action needed now

African governments, their partners in the private sector and development institutions are already responding decisively to the COVID-19 crisis. But we believe that most African countries need to expand those efforts considerably, increase the urgency of action, and identify big, bold solutions on both the health and economic fronts. Given the potentially devastating impact of the pandemic on health and livelihoods, nothing less will do.

African governments and development partners could explore several far-reaching solutions, including the following:

• Africa Recovery Plan. This would entail an extensive stimulus package or economic development plan, modelled on the Marshall Plan that provided aid to Europe following World War II.
• Africa Solidarity Fund. Businesses and individuals could contribute to a fund earmarked for immediate relief for the most vulnerable households and businesses.
• Private-sector liquidity fund. This could offer grants, loans, or debt for equity swaps to support businesses and limit job losses.
• African procurement platform. A common platform to procure medical supplies and equipment to combat the pandemic could provide an Africa-wide solution to challenges that each individual country is trying to address.
• Africa Green Program. A get-to-work program that plants billions of trees across the continent, using the currently out-of-work labor force, could provide employment and help solve global and local climate-change issues.